Distilling market noise into market sense

VisionMobile is the leading research company in the app economy. Our Developer Economics research program tracks developer experiences across platforms, revenues, apps, tools, APIs, segments and regions, via the largest, most global developer surveys.

The flywheel effect of Android and iOS (and why their rivals are grinding to a halt)

[Many analysts have speculated on the strength of mobile ecosystems based on the size and download traffic of app stores. But is this economically sound? Business Analyst Stijn Schuermans quantifies the network effects behind the Apple and Google ecosystems and the market barriers they have built.]

The holy grail in business is to create a product that sells itself, a momentum that automatically drives the business forward and that at the same time raises high barriers for competition. In the mobile domain, Google’s Android and Apple’s iOS are seen as such holy grails. Much has been written about the power of ecosystems. The race for large app stores with hundreds of thousands of apps has caused a lot of speculation about who the winners will be. But how powerful are those app store assets in reality?

Our analysis shows that Apple and Google have indeed managed to create an ecosystem that shows significant network effects. Developers and mobile phone users move in lock-step to create more and more value for each other. Windows Phone, Blackberry and Symbian on the other hand have not succeeded in starting up such network effects. Their sales remains dominated by other events.

The following two graphs show the relationship between the number of apps available on particular platforms at a particular point in time, and the number of devices shipped for that platform in the quarter just preceding it. The number of apps available can be considered a metric for how attractive a platform is for developers. Device shipments is likewise a measure of the attractiveness of a platform for its users. As time progresses, we move along each line towards the right.

For Android and Apple iOS, there is a surprisingly strong correlation between device shipments and amount of apps available. On a scale of 0 to 1, with 1 being a perfect straight line, correlation coefficients of 0,96 and 0,97 respectively indicate a very tight match. The two measures move so well together that there is no doubt that they are interdependent.

This is a clear and unambiguous illustration of the strong network effects that are in play in these platforms. As more devices are sold, the platform becomes more attractive to developers, who subsequently write more applications, hoping to reach a large user base. Likewise, as more applications become available, the platform gains more functionality for users, who will then be more inclined to buy a mobile phone that supports these apps. This becomes a virtuous cycle, a positive feedback loop which is so strong that it dominates all other aspects that might affect sales or app development, like promotions and advertisements, or the coolness of a particular technology for developers.

So far, there doesn’t seem to be an effect of diminishing returns. That is, an increase in the number of apps will drive an increase in the number of devices shipped, and vice versa, at a constant rate. You might expect that at a certain point, once for example half a million apps become available, the needs of most users would be covered. How many more QuadroPop of Hold ‘em poker clones will people need? However, this point apparently is not yet reached. We will leave the speculations about what that implies about the saturation of the targeted user segments to the reader.

Another interesting observation is that the relative rate of app versus devices growth is different for iOS and for Android. The data indicates that to persuade developers to write a thousand extra apps, 220.000 Android devices have to be additionally shipped each quarter versus only 45.000 Apple devices. This implies that users and developers (apps) assign a different level of value to each other depending on the platform they use.

Several tidbits of information support this last hypothesis. The Android market store has much more free applications available relative to Apple’s App Store. The difference is even larger in download behavior. Android users seem to spend less money on apps as well as other services like data plans. Two thirds of the mobile add revenue for Google actually comes from Apple devices, which again suggests that Apple users are more likely to use internet on their phones (and pay for the data plan).

The fact that Android users spend less money would, in a very direct way, make Android users less attractive to app developers. Hence, reading the graph ‘in reverse’ (with axes switched), the amount of extra users needed to entice an Android developer to write an extra app – the “marginal users per developer” – is higher (compensating for their lower spending), explaining the difference in slope.

So what about the other smartphone platforms out there, like Blackberry, Windows Phone or Nokia’s Symbian?

Here we see another story unfolding altogether. These platforms have not succeeded in kick-starting or sustaining significant network effects. While some traction in app development has been achieved, this has not had the same overwhelming influence on shipments or vice versa. Since network effects don’t dominate as in the case of Android and iOS, other factors come to the foreground.

For Nokia, this is the deal with Microsoft, where Symbian became a victim of Microsoft’s ambition to become Nokia’s exclusive smartphone OS provider, leading to its accelerated demise. BlackBerry’s lack of innovation in an environment where messaging (its key selling point) has become a commodity is causing it to steadily lose ground. While both of them might have benefited from network effects earlier in their history, they are now failing to sustain there ecosystems and losing the race for customers as a result.

Windows Phone is the most recent challenger. Microsoft has managed to convince developers to start writing software for the Windows phone platform, obviously trying to kick-start the network effect process, but device sales have not (yet) followed.

Network effects are a formidable barrier to entry. Once an ecosystem is well established, it is extremely difficult to lure participants away from it to competing platforms (breaking its back), or to stop its momentum. So far, despite similar efforts from its competitors, only Apple with iOS and Google with Android have been able to get the flywheel going. For these two platforms, the momentum will drive both consumer sales and developer enthusiasm with little extra investment needed. We might see diminishing returns effects in the future, but for now the feedback loop is going as strong as ever. Their rivals seem condemned to a futile catch-up race.

– Stijn

follow us on twitter: @visionmobile[Want something more than a glimpse into the complex world of apps and platforms? Check out our Software Economics seminar]

While it is clear the developers follow the installed base, being profit-driven, it is not clear that buyers follow the number of applications, else Android would not be outselling the iPhone.

I dont think you have proven that this metric is essential for the success of a platform. Both Blackberry and Symbian had high shipments and low number of applications.

In short, even a very strong correlation does not mean causation.

http://visionmobile.com/blog Stijn Schuermans

In my analysis, I use the number of applications to detect trends, not as an absolute number. More apps generally means more value for users, even though the average value of an app can, and does, differ for each platform. There is no contradiction in Android outselling Apple, even though the latter has more apps. Neither does it show that users don't value the amount of apps.

What the graphs indicate is that apps are an important part of the feedback loop specifically for Android and iOS. Network effects like the one between developers and users in those two ecosystems are an excellent way to make platforms a success. They are not the only way though – I completely agree with you on that. Blackberry's initial success, for example, was built on another network effect based on messaging. Blackberry was a communication platform, Android and iOS are application platforms. The graphs demonstrate that while Blackberry is trying to transform itself to the latter, it doesn't have as much success as iOS and Android.
(See also http://www.visionmobile.com/blog/2011/07/platform… )

– Stijn

Mark Wilcox

The graphs for iOS and Android show that the number of users and number of apps have followed similar growth curves, nothing more. There is almost certainly some truth in what you are saying but your data does not prove anything. As the previous commenter stated, correlation does not imply causation.

My hypothesis is that number of apps is in fact irrelevant beyond being an indicator that developers are interested in the platform. Almost all the interesting stuff happens on iOS first and Android is currently the only other game in town. What matters is that the apps users want are available and new interesting services are brought to the platform quickly. The long tail does not appear to be of significant value or interest so far, or at least it isn't actually very long. The vast majority (>90%) of both downloads and revenue on both platforms is concentrated on a tiny fraction of the apps. Rather than treat all apps as equal, I'd suggest analysts look at the most popular ones and see how many of those are missing from the struggling platforms. You can almost guarantee that the platform owners have offered to pay for a port of all the top apps, so the number that didn't even want to port on those terms is an indicator of the more important trends which are actually the cause of the current situation.

How many Symbian device owners even knew their phone could run apps? How many had data plans? Can you create a decent user experience on a BlackBerry? How painful is it for a developer to do so? How many versions do they need to build? How many BlackBerry owners have another smartphone as their personal device? How many of those that don't are teenagers without a data plan? What's the relative importance of games in the application offering. What fraction of Symbian and BlackBerry devices are capable games platforms?

Steve

The economy is the controlling factor as to how much money is spent. Android is the cheaper of the two, Apple and Google, to use and own. Google's strategy has always been to offer digital services for free. The tradeoff for the Google user was privacy for those free services.

The economy is getting worse, but not yet bad enough to make Apple lose their footing to Google. If the economy does get seriously worse, it could turn the mobile war to Google's favor. That is if another choice does not become available soon or Apple does not take their wares to other countries that are not in such bad financial shape. Apple is just now getting a hold in the super huge Asian markets.

Bottom line, the duopoly looks like what you said, but the economic situation is a very important factor as to which marketing model will win. Apple has terrific customer service, by the way. Android, not so much.

Joe

The problem with that graph is that most of those Android apps are VIRUSES as has been recently reported.

Android Users are in for a wake up call when their bank-accounts get drained by malicious apps.

VISIONMOBILE JOBS

WORK WITH US

Product Manager - app analytics

I also want to subscribe to the monthly newsletter, with updates on VisionMobile news and research (you will receive a separate email for this list, please subscribe to both to receive the newsletter and blog updates)